All commodities facing difficult times

Published:07:51Saturday 25 July 2015

I have been involved with agriculture for a long time, but it is hard to remember a time when things were so universally bad. In the past disease and weather caused big problems, but what the industry is experiencing now is unrelenting price pressure across all commodities.

There are number of reasons, not least the pressure from supermarkets to fund their price wars, but top of the list is the weakness of the euro against sterling.

It is the dairy sector that has been making headlines, but other commodities are also under pressure, and the problems of the dairy sector are not down to currency alone. The world is still producing more milk than the market needs and that can only have one outcome. The old adage is that the cure for low prices is low prices, in that the response should be to cut production, leading to an improvement in prices. However this time, globally, farmers seem to be increasing production to have more milk to cover their overheads and that is making a bad situation worse.

Buyers in countries that import dairy products know they have no need to hold stocks. Until that situation changes global markets will remain weak, and the strength of sterling against the euro is making it difficult for processors here to compete. That sounds gloomy, but based on what analysts are saying things are not going to change quickly.

At the start of this year those suggesting there would be no price improvement before 2016 looked to be the ultimate pessimists. Now it seems they were the realists. We are facing into a tough autumn and winter for dairy farmers, when the name of the game will be survival – and there is no way to sugar-coat that particular pill.

The European Commission has begun to react, but it has still not acknowledged the scale of the crisis across Europe. The first milk powder has gone into intervention in the Baltic States; Brussels has admitted its Milk Market Observatory needs to be more relevant, and has agreed to extend private storage for some dairy products. However it is still ignoring all suggestions that the intervention price needs to be reviewed, and securing a change of that stance will not be easy. This is a situation the weak euro is making worse. That is here to stay, since nothing is happening in the eurozone to boost confidence in the currency.

The euro is about to pack another punch for farmers across all commodities. The industry has already been hit by it making exports uncompetitive and leaving the UK an open goal for eurozone competitors seeking business with the major supermarkets. The next punch will be at the end of September when the rate to convert euro into sterling for CAP payments is set. This is on the last trading day of September, or it can be averaged over the month – not that this would make any difference this year. As things stand the sterling value will be down by 10 per cent. This will put a big dent in payments in December, at a time when cash flows will be under pressure.

To put this in perspective that 10 per cent reduction from 2014 to 2015 is on top of a similar reduction from 2013 to last year.

Add into that the changes to the CAP and the reversal of financial fortunes is all the more dramatic.

In the years before 2013 the euro was in the 80 to 85 pence range and we did not realise then that these were good times for the industry that we would eventually miss. The weak euro is great news for anyone jetting off to Spain or Portugal, but those brief gains for farming families will be more than offset by what the euro is doing to margins – and that assumes people can afford a holiday this year.

When things settle the industry needs to ask itself whether there are effective ways to take volatility out of the system. The era of marketing boards did that, but now different solutions will be needed. These would include a properly functioning futures market for dairy products, and for all commodities some mechanism to balance out the peaks and troughs of prices and currency. This might seem bureaucratic, but the alternative is to live on a permanent roller coaster of boom and bust, where the booms get shorter and the busts harder to handle.